UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1999 -------------------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from__________________to______________________ Commission file number 000-23423 ------------------------------------------- C&F Financial Corporation - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Virginia 54-1680165 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) Eighth and Main Streets West Point VA 23181 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Issuer's telephone number) (804) 843-2360 ----------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,650,276 as of August 12, 1999.
<TABLE> TABLE OF CONTENTS <CAPTION> Part I - Financial Information Page - ------------------------------ ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 and December 31, 1998............................................................1 Consolidated Statements of Income - Three months and six months ended June 30, 1999 and 1998.......................................2 Consolidated Statements of Shareholders' Equity Six months ended June 30, 1999 and 1998 .......................................................3 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998........................................................5 Notes to Consolidated Financial Statements.........................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation ......................................................................9 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................14 Part II - Other Information - --------------------------- Item 1. Legal Proceedings ................................................................................14 Item 2. Changes in Securities ............................................................................14 Item 3. Defaults Upon Senior Securities...................................................................14 Item 4. Submission of Matters to a Vote of Security Holders ..............................................14 Item 5. Other Information ................................................................................15 Item 6. Exhibits and Reports on Form 8-K..................................................................15 Signatures ..................................................................................................16 </TABLE>
<TABLE> PART I - FINANCIAL STATEMENTS ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS June 30, 1999 December 31, 1998 - ------ ------------- ----------------- (Unaudited) <S> <C> <C> Cash and due from banks $ 5,891 $ 8,140 Interest -bearing deposits in other banks and fed funds 432 333 ----------- ----------- Total cash and cash equivalents 6,323 8,473 Investment securities Available for sale securities at fair value, amortized cost of $27,458 and $21,481, respectively 27,095 21,888 Held to maturity at amortized cost, fair value of $38,638 and $40,865, respectively 37,589 38,810 Loans held for sale, net 39,578 66,993 Loans, net 181,642 169,918 Federal Home Loan Bank stock 1,585 1,706 Corporate premises and equipment, net of accumulated depreciation 7,293 6,466 Accrued interest receivable 1,939 2,374 Other assets 4,663 4,235 ----------- ----------- Total assets $ 307,707 $ 320,863 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest-bearing demand deposits $ 40,742 $ 40,908 Savings and interest-bearing demand deposits 107,668 101,631 Time deposits 108,270 109,134 ----------- ----------- Total deposits 256,680 251,673 Other borrowings 12,036 24,661 Accrued interest payable 609 598 Other liabilities 3,912 7,284 ----------- ----------- Total liabilities 273,237 284,216 ----------- ----------- Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 3,646,976 and 3,866,888 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively) 3,647 3,867 Additional paid-in capital 123 476 Retained earnings 30,662 31,739 Accumulated other comprehensive income, net of tax of $20 and $291, respectively 38 565 ----------- ----------- Total shareholders' equity 34,470 36,647 ----------- ----------- Total liabilities and shareholders' equity $ 307,707 $ 320,863 =========== =========== The Company's notes are an integral part of the consolidated financial statements. </TABLE>
<TABLE> CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands of dollars, except for per share amounts) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, Interest Income 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Interest and fees on loans $ 4,505 $ 4,570 $ 9,509 $ 8,575 Interest on other market investments and fed funds 173 7 404 17 Interest on investment securities U.S. Treasury Securities 20 49 69 99 U.S. Government agencies and corporations 200 620 363 1,257 Tax-exempt obligations of states and political subdivisions 587 525 1,116 1,033 Corporate bonds and other 107 94 221 197 ------------ ----------- ------------- ----------- Total interest income 5,592 5,865 11,682 11,178 Interest Expense Savings and interest-bearing deposits 744 675 1,443 1,358 Certificates of deposit, $100,000 or more 216 186 438 386 Other time deposits 1,116 1,141 2,253 2,251 Short-term borrowings and other 131 544 313 739 ------------ ----------- ------------- ----------- Total interest expense 2,207 2,546 4,447 4,734 Net interest income 3,385 3,319 7,235 6,444 Provision for loan losses 75 175 250 250 ------------ ----------- ------------- ----------- Net interest income after provision for loan losses 3,310 3,144 6,985 6,194 Other Operating Income Gain on sale of loans 1,719 1,865 3,883 3,143 Service charges on deposit accounts 273 256 542 518 Other service charges and fees 625 461 1,110 825 Other income 328 259 588 494 ------------ ----------- ------------- ----------- Total other operating income 2,945 2,841 6,123 4,980 Other Operating Expenses Salaries and employee benefits 2,403 1,987 4,663 3,783 Occupancy expenses 521 515 997 1,005 Goodwill amortization 69 69 138 138 Other expenses 1,099 1,201 2,101 2,081 ------------ ----------- ------------- ----------- Total other operating expenses 4,092 3,772 7,899 7,007 Income before income taxes 2,163 2,213 5,209 4,167 Income tax expense 529 596 1,429 1,115 ------------ ----------- ------------- ----------- Net Income $ 1,634 $ 1,617 $ 3,780 $ 3,052 ============ =========== ============= =========== Per Share Data Net Income - Basic $ .45 $ .42 $ 1.02 $ .78 Net Income - Assuming Dilution $ .44 $ .41 $ 1.00 $ .78 Cash Dividends Paid and Declared $ .12 $ .11 $ .24 .21 Weighted average number of shares and common stock equivalents outstanding 3,698,418 3,929,502 3,780,164 3,912,197 The Company's notes are an integral part of the consolidated financial statements. </TABLE> 2
<TABLE> CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts in thousands of dollars) <CAPTION> Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income Total ----- ------- ------ -------- ------ ----- <S> <C> <C> <C> <C> <C> <C> Balance January 1, 1998 $ 1,916 $ 118 $ 29,236 $ 530 $ 31,800 Comprehensive Income Net income $ 3,052 3,052 3,052 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment(1) 54 54 54 --------- Comprehensive income $ 3,106 ========= Stock options exercised 15 266 281 Stock dividends 1,932 (1,932) Cash dividends (810) (810) -------- ------ --------- ------- --------- Balance June 30, 1998 $ 3,863 $ 384 $ 29,546 $ 584 $ 34,377 ======== ====== ========= ======= ========= --------------------------- (1) There were no reclassification adjustments for the six months ended June 30, 1998. The Company's notes are an integral part of the consolidated financial statements. </TABLE> 3
<TABLE> CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts in thousands of dollars) Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income Total ----- ------- ------ -------- ------ ----- <S> <C> <C> <C> <C> <C> <C> Balance January 1, 1999 $ 3,867 $ 476 $ 31,739 $ 565 $ 36,647 Comprehensive Income Net income $ 3,780 3,780 3,780 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment(1) (527) (527) (527) --------- Comprehensive income $ 3,253 ========= Stock options exercised 15 129 144 Repurchase of Common Stock (235) (482) (3,971) (4,688) Cash dividends (886) (886) -------- ------ --------- ------ --------- Balance June 30, 1999 $ 3,647 $ 123 $ 30,662 $ 38 $ 34,470 ======== ====== ========= ====== ========= --------------------------- (1) There were no reclassification adjustments for the six months ended June 30, 1999. The Company's notes are an integral part of the consolidated financial statements. </TABLE> 4
<TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands of dollars) <CAPTION> Six Months Ended June 30, ------------------------- 1999 1998 ---- ---- Cash flows from operating activities: <S> <C> <C> Net income $ 3,780 $ 3,052 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 455 505 Amortization of goodwill 138 138 Provision for loan losses 250 250 Accretion of discounts and amortization of premiums on investment securities, net (41) (25) Proceeds from sale of loans 285,138 210,258 Origination of loans held for sale (257,722) (236,763) Change in other assets and liabilities: Accrued interest receivable 435 (465) Other assets (379) 206 Accrued interest payable 11 7 Other liabilities (3,289) (259) ----------- ----------- Net cash provided by (used in) operating activities 28,776 (23,096) ---------- ----------- Cash flows from investing activities: Proceeds from maturities of investments held to maturity 1,227 6,363 Proceeds from sales and maturities of investments available for sale 10,185 4,036 Purchase of investment securities -- (2,573) Purchase of investments available for sale (16,155) (11,577) Net increase in customer loans (11,974) (8,574) Purchase of corporate premises and equipment (1,282) (352) Sale (purchase) of Federal Home Loan Bank stock 121 (1,308) ---------- ---------- Net cash used in investing activities (17,878) (13,985) ----------- ----------- Cash flows from financing activities: Net increase in demand, interest-bearing demand and savings deposits 5,871 3,181 Net (decrease) increase in time deposits (864) 1,911 Net (decrease) increase in other borrowings (12,625) 33,404 Proceeds from exercise of stock options 144 281 Repurchase of common stock (4,688) -- Cash dividends (886) (810) ----------- ----------- Net cash (used in) provided by financing activities (13,048) 37,967 ----------- ---------- Net increase (decrease) in cash and cash equivalents (2,150) 886 Cash and cash equivalents at beginning of period 8,473 8,871 ---------- ---------- Cash and cash equivalents at end of period $ 6,323 $ 9,757 ========== ========== Supplemental disclosure Interest paid $ 4,436 $ 4,727 Income taxes paid $ 1,457 $ 1,221 The Company's notes are an integral part of the consolidated financial statements. </TABLE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. In the opinion of C&F Financial Corporation's management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of June 30, 1999, the results of operations for the three and six months ended June 30, 1999 and 1998, and cash flows for the six months ended June 30, 1999 and 1998 have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Annual Report on Form 10-K for the year ended December 31, 1998. The consolidated financial statements include the accounts of C&F Financial Corporation ("the Company") and its subsidiary, Citizens and Farmers Bank ("the Bank") with all significant intercompany transactions and accounts being eliminated in consolidation. Note 2 Net income per share assuming dilution has been calculated on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding for the applicable periods. Weighted average number of shares of common stock and common stock equivalents was 3,698,418 and 3,929,502 for the three months ended June 30, 1999 and 1998, respectively, and 3,780,164 and 3,912,197 for the six months ended June 30, 1999 and 1998, respectively. Note 3 During March of 1999 the Company repurchased 235,000 shares of its common stock from six shareholders at prices between $19.88 and $20.00 per share in privately negotiated transactions. Note 4 During April of 1999 Citizens and Farmers Bank announced that it had signed a contract to purchase a piece of land in Williamsburg, Virginia. The site will house the Bank's tenth office, the third in the James City County/Williamsburg market. The Bank plans to open this office by late 1999 or early 2000. Also during the first quarter of 1999, the Company announced the formation of a bank in Hanover County which would be operated as a division of Citizens and Farmers Bank with the first branch being located in the Mechanicsville area of Hanover County. As a result of a change in its strategic vision, Citizens and Farmers Bank has decided to currently forego the Hanover market and instead concentrate its initial efforts on the market more central to Richmond proper. The Bank recently announced the formation of Citizens & Commerce Bank ("CCB") which will be operated as a division of the Bank. CCB will have an Area President and a Regional Board of Directors with local decision-making responsibilities. CCB plans to open its first full-service branch banking facility in November of 1999 at 8001 W. Broad Street in Richmond, Virginia. The opening of multiple branch banking facilities in the greater Richmond area is anticipated over the next several years. 6
Note 5 The Company operates in a decentralized fashion in two principal business activities, retail banking and mortgage banking. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities. Mortgage banking operating revenues consist mainly of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income. The Company also has an investment company and a title company subsidiary which derive revenues from brokerage and title insurance services, respectively. The results of these subsidiaries are not significant to the Company as a whole and have been included in "Other." The following table presents segment information for the periods ended June 30, 1999 and 1998. <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1999 Retail Mortgage Banking Banking Other Eliminations Consolidated ------- ------- ----- ------------ ------------ Revenues: <S> <C> <C> <C> <C> <C> Interest income $ 5,498 $ 435 $ -- $ (341) $ 5,592 Gain on sale of loans -- 1,719 -- -- 1,719 Other 468 530 228 -- 1,226 Total operating income 5,966 2,684 228 (341) 8,537 Expenses: Interest expense 2,207 341 -- (341) 2,207 Salaries and employee benefits 1,291 1,033 79 -- 2,403 Other 1,052 667 45 -- 1,764 Total operating expenses 4,550 2,041 124 (341) 6,374 Income before income taxes 1,416 643 104 -- 2,163 Total assets 303,859 39,287 54 (35,493) 307,707 Capital expenditures $ 847 $ 65 $ -- $ -- $ 912 - -------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1998 Retail Mortgage Banking Banking Other Eliminations Consolidated ------- ------- ----- ------------ ------------ Revenues: Interest income $ 5,743 $ 779 $ -- $ (657) $ 5,865 Gain on sale of loans -- 1,865 -- -- 1,865 Other 424 371 181 -- 976 Total operating income 6,167 3,015 181 (657) 8,706 Expenses: Interest expense 2,546 657 -- (657) 2,546 Salaries and employee benefits 1,041 886 60 -- 1,987 Other 1,103 825 32 -- 1,960 Total operating expenses 4,690 2,368 92 (657) 6,493 Income before income taxes 1,477 647 89 -- 2,213 Total assets 317,039 50,546 43 (48,672) 318,956 Capital expenditures $ 90 $ 52 $ -- $ -- $ 142 7
- -------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1999 Retail Mortgage Banking Banking Other Eliminations Consolidated ------- ------- ----- ------------ ------------ Revenues: Interest income $ 11,425 $ 1,013 $ -- $ (756) $ 11,682 Gain on sale of loans -- 3,883 -- -- 3,883 Other 909 924 407 -- 2,240 Total operating income 12,334 5,820 407 (756) 17,805 Expenses: Interest expense 4,447 756 -- (756) 4,447 Salaries and employee benefits 2,443 2,072 148 -- 4,663 Other 2,077 1,329 80 -- 3,486 Total operating expenses 8,967 4,157 228 (756) 12,596 Income before income taxes 3,367 1,663 179 -- 5,209 Total assets 303,859 39,287 54 (35,493) 307,707 Capital expenditures $ 1,147 $ 135 $ -- $ -- $ 1,282 - -------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1998 Retail Mortgage Banking Banking Other Eliminations Consolidated ------- ------- ----- ------------ ------------ Revenues: Interest income $ 10,996 $ 1,187 $ -- $ (1,005) $ 11,178 Gain on sale of loans -- 3,143 -- -- 3,143 Other 827 672 338 -- 1,837 Total operating income 11,823 5,002 338 (1,005) 16,158 Expenses: Interest expense 4,734 1,005 -- (1,005) 4,734 Salaries and employee benefits 2,121 1,549 113 -- 3,783 Other 2,080 1,334 60 -- 3,474 Total operating expenses 8,935 3,888 173 (1,005) 11,991 Income before income taxes 2,888 1,114 165 -- 4,167 Total assets 317,039 50,546 43 (48,672) 318,956 Capital expenditures $ 276 $ 76 $ -- $ -- $ 352 </TABLE> The retail banking segment provides the mortgage banking segment with the funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the daily FHLB advance rate plus 50 basis points. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking and other segments. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion supplements and provides information about the major components of the results of operations and financial condition, liquidity and capital resources of C&F Financial Corporation (the "Company"). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and supplemental financial data. Overview Net income increased 1% to $1,634,000 for the three months ended June 30, 1999 compared to $1,617,000 for the same period of 1998. Earnings per share were $.44 for the three month period, up 7% from $.41 per share for the three months ended June 30, 1998. Net income for the first six months ended June 30, 1999 was $3,780,000 compared to $3,052,000 for the same period of 1998. Included in earnings for the first six months of 1999 is $370,000 in interest income (after taxes) which was collected in February 1999 resulting from the payoff of a non-accrual loan which has been on the Bank's books for the past several years. Excluding this interest income, net income increased 12% and earnings per share increased 15% over the six months ended June 30, 1998. Profitability as measured by the Company's annualized return on average assets (ROA) was 2.15% for the three months ended June 30, 1999 compared to 2.08% for the same period of 1998. For the first six months of 1999, ROA, excluding the one-time interest income, was 2.23% compared to 2.06% for the first six months of 1998. Another key indicator of performance, the annualized return on average equity (ROE) for the three months ended June 30, 1999 was 19.09% compared to 19.12% for the three months ended June 30, 1998. For the first six months of 1999, excluding the one-time interest income, ROE was 19.38% compared to 18.40% for the first six months of 1998. RESULTS OF OPERATIONS Net Interest Income Net interest income for the three months ended June 30, 1999 was $3.4 million, an increase of $66,000, or 2%, from $3.3 million for the three months ended June 30, 1998. For the quarter ended June 30, 1999, the net interest margin on a taxable equivalent basis increased to 5.18% from 4.94% for the quarter ended June 30, 1998. This increase was offset by a decrease in the balance of average earning assets to $286.7 million for the quarter ended June 30, 1999 from $292.4 million for the quarter ended June 30, 1998. The decrease in average earning assets is a result of an approximate $20.8 million decrease in the securities' portfolio which was a result of securities being called due to the lower interest rate environment experienced during the second half of 1998 and the first quarter of 1999. The excess funds resulting from the securities being called was used to pay off borrowings from the Federal Home Loan Bank (FHLB). The Bank borrows from the FHLB to fund loans originated and subsequently sold by C&F Mortgage Corporation. For the three months ended June 30, 1999, the yield on interest earning assets decreased to 8.26% from 8.43% for the three months ended June 30, 1998. The decrease in the yield is mainly attributed to a decrease in the yield on the Bank's loan portfolio resulting from the overall lower interest rate environment in the second quarter of 1999 as compared to the second quarter of 1998. The decrease in the yield on interest earning assets was offset by a decrease in the Company's cost of funds to 3.89% for the second quarter of 1999 from 4.35% for the same period in 1998. The decrease was a result of the overall lower interest rate environment and a decrease in higher cost borrowings from the FHLB. 9
Net interest income for the six months ended June 30, 1999, excluding the one-time intrest income of approximately $560,000 before taxes, was $6.7 million, an increase of $231,000, or 4%, from $6.4 million for the six months ended June 30, 1998. The net interest margin on a taxable equivalent basis for the six months ended June 30, 1999 was relatively flat at 5.08% compared to 5.05% for the first six months of 1998. The average balance of interest earning assets increased $9.4 million to $287.9 million for the first six months of 1999 from $278.5 million for the first six months of 1998. The increase in average earning assets is a result of an increase in the average balance of the Bank's loan portfolio, interest earning deposits in other banks and fed funds offset by a decrease in the average balance in securities portfolio. The increase in interest earning deposits in other banks and fed funds is a result of excess funds generated from an increase in deposits and funds generated from securities being called. While the Bank's loan portfolio continues to grow, excess funds cannot be deployed into loans fast enough. The yield on interest earning assets decreased to 8.17% for the six months ended June 30, 1999 from 8.45% for the same period in 1998. This decrease was more than offset by a decrease in the cost of funds to 3.93% for the first half of 1999 from 4.26% for the first half of 1998. The decrease in the yield on interest earning assets is the result of the overall lower interest rate environment and the increase in the average balances held in lower yielding interest deposits in other banks and fed funds. The decrease in the cost of funds is a result of the overall lower interest rate environment and the decrease in the average balance of higher cost borrowings from the FHLB. Non-Interest Income Other operating income increased $104,000, or 4%, to $2,945,000 for the second quarter of 1999 from $2,841,000 for the second quarter of 1998. Other operating income increased $1,143,000, or 23%, to $6,123,000 for the first six months of 1999 from $4,980,000 for the first six months of 1998. The increase in other income is mainly attributed to an increase in gain on sale of loans resulting from increased production at C&F Mortgage Corporation. Loans closed at C&F Mortgage Corporation for the quarter ended June 30, 1999 and 1998 was $141,078,000 and $132,705,000, respectively. Loans sold were $128,004,000 and $124,190,000 for the quarters ended June 30, 1999 and 1998, respectively. Loans closed for the six months ended June 30, 1999 and 1998 were $257,722,000 and $236,798,000, respectively, while loans sold were $285,005,000 and $208,163,000 for the six months ended June 30, 1999 and 1998, respectively. Non-Interest Expense Other operating expenses increased $320,000, or 8%, to $4,092,000 for the second quarter of 1999 from $3,772,000 for the second quarter of 1998. Other operating expenses increased $892,000, or 13%, to $7,899,000 for the first six months of 1999 from $7,007,000 for the first six months of 1998. The increase in other expenses is mainly attributed to increases in salaries and employee benefits due to increased production at C&F Mortgage Corporation. Year 2000 Issue The Y2K issue involves the risk that computer programs and computer systems may not be able to perform without interruption into the year 2000. If computer systems do not correctly recognize the date change from December 31, 1999 to January 1, 2000, computer applications that rely on the date field could fail or create erroneous results. Such erroneous results could affect interest payments or due dates and could cause the temporary inability to process 10
transactions and to engage in ordinary business activities. The failure of the Company, its suppliers, and its borrowers to address the Y2K issue could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. In 1997, the Company initiated a review and assessment of all hardware and software to confirm that it will function properly in the year 2000. Based on this assessment, we believe the Company's mainframe hardware and banking software are currently Y2K compliant. However, testing is required to confirm this. Testing began in the first quarter of 1998 and was substantially complete by June 30, 1999. For certain other systems, the Company has determined that it will have to replace or modify certain pieces of hardware and/or software so that the systems will properly function in the year 2000. For systems that the Company relies on third-party vendors, these vendors have been contacted and have indicated that the hardware and/or software will be Y2K compliant. The Company has also initiated formal communications with all significant loan and deposit customers to determine the extent to which the Company is vulnerable to those third-parties' failure to remedy their own Y2K issue. The Company believes that exposure to customers' not being Y2K compliant is minimal. The Company plans to complete the majority of the Year 2000 project by September 30, 1999. To date, the Company has expensed $150,000 related to the assessment of and efforts in connection with the Year 2000 issue. Remaining expenditures are not expected to have a material effect on the Company's consolidated financial statements. The Company continues to assess its risk from other environmental factors over which it has little direct control, such as electrical power supply, and voice and data transmission. Because of the nature of these external factors, the Company is not actively engaged in any repair, replacement, or testing efforts for these services. Based on its current assessments and remediation plans, which are based in part on certain representations of third-party services, the Company does not expect that it will experience a significant disruption of its operations as a result of the change in the new millennium. Although the Company has no reason to conclude that a failure will occur, the most likely worst-case Y2K scenario would entail a disruption or failure of the Company's power suppliers' or voice and data transmission suppliers' capability to provide power to data transmission services to a computer system or a facility. If such a failure were to occur, the Company would implement a contingency plan as described below. While it is impossible to quantify the impact of such a scenario, the most likely worst-case scenario would entail diminishment of service levels, some customer inconvenience, and additional, as yet not understood, costs associated with the implementation of the contingency plan. For the computer systems and facilities that it has determined to be most critical, the Company expects to complete development, testing, and adoption and testing of business contingency plans by September 30, 1999. These plans will conform to recently issued guidelines from the FFIEC on business contingency planning for Y2K readiness. Contingency plans will include, among other actions, manual workarounds and identification of resource requirements and alternative solutions for resuming critical business processes in the event of a Y2K-related failure. While the Company will have contingency plans in place to address a temporary disruption in these services, there can be no assurance that any disruption or failure will be only temporary, that the Company's contingency plans will function as anticipated, or that the results of operations, financial condition, or liquidity of the Company will not be adversely affected in the event of a prolonged disruption or failure. Additionally, there can be no assurance that the FFIEC or other federal or state regulators will not issue new regulatory requirements that require additional work by the Company and, if issued, that new regulatory requirements will not increase the cost or delay the completion of the Company's Y2K project. The costs of the project and the date on which the Company plans to complete the Y2K modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. Specific 11
factors that might cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability of third-party vendors to correct their software and hardware, the ability of significant customers to remedy their Year 2000 issues, and similar uncertainties. Income Taxes Income tax expense for the three months ended June 30, 1999 amounted to $529,000, resulting in an effective tax rate of 24.5% compared to $596,000, or 26.9%, for the three months ended June 30, 1998. Income tax expense for the six months ended June 30, 1999 amounted to $1,429,000, resulting in an effective tax rate of 27.4% compared to $1,115,000, or 26.7%, for the six months ended June 30, 1998. The increase in the effective tax rate for the quarter and for the year is a result of the increase in earnings subject to a 34% tax rate versus earnings subject to no taxes such as certain loans to municipalities or investment obligations of state and political subdivisions. Asset Quality-Allowance /Provision For Loan Losses The Company had $250,000 in provision expense for the first six months of 1999 and for the first six months of 1998. Loans charged off amounted to $6,000 and $46,000 for the six months ended June 30, 1999 and 1998, respectively. Recoveries amounted to $18,000 and $25,000 for the six months ended June 30, 1999 and 1998, respectively. The allowance for loan losses was $3.0 million at June 30, 1999 and $2.8 million at December 31, 1998. The allowance approximates 1.6% of total loans outstanding at June 30, 1999 and December 31, 1998. Management feels that the reserve is adequate to absorb any losses on existing loans which may become uncollectible. Nonperforming Assets Total non-performing assets, which consist of the Company's non-accrual loans and other real estate owned was $627,000 at June 30, 1999 compared to $463,000 at December 31, 1998. FINANCIAL CONDITION Summary At June 30, 1999, the Company had total assets of $307.7 million compared to $320.9 million at December 31, 1998. Interest-Bearing Deposits in Other Banks and Fed Funds At June 30, 1999, interest-bearing deposits in other banks and fed funds amounted to $432,000 compared to $333,000 at December 31, 1998. Loan Portfolio At June 30, 1999, loans held for sale amounted to $39.6 million compared to $67.0 million held at December 31, 1998. The decrease in the balance from December 31, 1998 is a result of a decrease in loan originations from 12
$154,000,000 for the fourth quarter of 1998 to $141,000,000 for the second quarter of 1999. The decrease in originations for the second quarter of 1999 is a result of an increase in the interest rates for the second quarter of 1999 as compared to the fourth quarter of 1998. The following table sets forth the composition of the Company's loans in dollar amounts and as a percentage of the Company's total gross loans held for investment at the dates indicated: <TABLE> <CAPTION> June 30, 1999 December 31, 1998 (Dollars in Thousands) Amount Percent Amount Percent ------ ------- ------ ------- <S> <C> <C> <C> <C> Real estate - mortgage $ 86,936 47% $ 86,311 50% Real estate - construction 4,740 3 5,359 3 Commercial, financial and agricultural 72,183 39 62,885 36 Equity lines 9,703 5 8,580 5 Consumer 11,102 6 9,544 6 ------------- --- ----------- --- Total loans 184,664 100% 172,679 100% Less unearned discount (1) (1) Less allowance for possible loan losses (3,021) (2,760) ------------- ----------- Total loans, net $ 181,642 $ 169,918 </TABLE> Investment Securities At June 30, 1999, total investment securities were $64.7 million compared to $60.7 for December 31, 1998. Securities of U.S. Government agencies and corporations represent 21.2% of the total securities portfolio, obligations of state and political subdivisions were 69.4%, U.S. Treasury securities were 1.6%, and preferred stocks were 7.8% at June 30, 1999. Deposits Deposits totaled $256.7 million at June 30, 1999 compared to $251.7 at December 31, 1998. Non-interest bearing deposits totaled $40.7 million at June 30, 1999 compared to $40.9 million at December 31, 1998. Liquidity At June 30, 1999, cash, securities classified as available for sale and interest-bearing deposits were 11.6% of total earning assets. Asset liquidity is also provided by managing the investment maturities. Additional sources of liquidity available to the Company include its subsidiary bank's capacity to borrow additional funds through an established federal funds line with a regional correspondent bank and through an established line with the Federal Home Loan Bank. Capital Resources The Company's capital position continues to exceed regulatory requirements. The Company's Tier I capital ratio was 13.5% at June 30, 1999 13
compared to 12.5% at December 31, 1998. The total risk-based capital ratio was 14.7% at June 30, 1999 compared to 13.4% at December 31, 1998. These ratios are in excess of the mandated minimum requirements. Shareholders' equity was $34.5 million at the end of the second quarter of 1999 compared to $36.6 million at December 31, 1998. The leverage ratio consists of Tier I capital divided by average assets. At June 30, 1999, the Company's leverage ratio was 10.8% compared to 11.5% at December 31, 1997. Each of these exceeds the required minimum leverage ratio of 3%. New Accounting Pronouncements There have been no significant pronouncements since the December 31, 1998 10K was filed. Effects of Inflation The effect of changing prices on financial institutions is typically different from other industries as the Company's assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price level indices. Impacts of inflation on interest rates, loan demands, and deposits are reflected in the consolidated financial statements. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 The statements contained in this report that are not historical facts may be forward looking statements. The forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes from the quantitative and qualitative disclosures made in the December 31, 1998 Form 10K. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party of or which property of the Company is subject. ITEM 2 - CHANGES IN SECURITIES - Inapplicable ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Inapplicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None 14
ITEM 5 - OTHER INFORMATION - Inapplicable ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K 15
SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. C&F FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Registrant) Date August 12, 1999 /s/ Larry G. Dillon ------------------------------ ---------------------------------- Larry G. Dillon, President and Chief Executive Officer Date August 12, 1999 /s/ Thomas F. Cherry ------------------------------ ---------------------------------- Thomas F. Cherry, Chief Financial Officer